As Oil Collapses, the Future of Solar Turns Brighter

The crude oil market is in free fall as demand plummets across the world. The fallout from this disruption in the global energy market is ongoing, but one thing is for certain – the solar industry isn’t going anywhere.

COVID-19 Exposes Oil’s Vulnerabilities

The spread of COVID-19 throughout every corner of the world has resulted in depressingly high levels of death, sickness, and suffering. The economic catastrophe that the virus has brought to the world has been so profound, deep, and sudden that it draws no modern-day comparison. This reality in the United States is perhaps most evident in the oil and gas industry, which has been operating on near life support over the past couple months.

At the end of February, West Texas Intermediate (WTI) crude oil was trading at about $45.00 per barrel. The price has since tanked, even trading well into negative territory (!) on April 20. Oil futures contracts trade by the month, and the collapse into negative territory for May contracts was fueled by a once unimaginable glut in supply and a lack of buyers to be had on the market, thanks to widespread stay-at-home orders that have kept Americans off the roadways (and far from gas pumps) in record numbers. The market is more bullish on oil contracts for June – and beyond – as the expectation is that COVID-19-related economic anxieties will start to wane and demand for petroleum products will return to “normal.”

Photo Source: CNBC

Yet there is good reason to believe that a return to normal is not in the cards for an industry that may be in the midst of a wholesale restructuring.

Even before the COVID-19 crisis hit its peak in the United States, the oil and gas industry was already showing unprecedented levels of volatility thanks to a price war waged by Russia and Saudi Arabia. In March, Russia backed out at the last minute of an OPEC agreement to limit worldwide oil production, which was meant to bring stability to worldwide oil prices. Saudi Arabia responded in kind by flooding an already oversaturated market with millions of additional barrels of oil, in an effort to effectively put competitor U.S. oil producers out of business. The move seemed to have the intended result, as layoffs and furloughs of oil and gas workers in the Houston area reach into the tens of thousands with some estimates that Houston’s economy could shed up to 300,000 jobs.

Whether Big Oil execs want to admit it or not, the fragility of their industry has been exposed for all to see on the world stage. The resulting fallout from lending institutions, investors, policymakers, and everyone in between is just beginning. As Andrew Logan, Senior Director of Oil and Gas at Ceres put it:

“The industry, at least those companies that survive the downturn, needs to prepare for a very different kind of future, one in which volatility and uncertainty around demand will rule the day, and the only companies that attract capital will be the ones with detailed, specific and ambitious plans for managing the transition, and even pivoting to renewable energy — or for winding down their assets in an orderly way.”

The fact of the matter is that what the oil and gas industry is currently going through may just be a precursor to the volatility that the industry is in-store for in a rapidly decarbonizing world.

The International Energy Agency (IEI) notes that demand growth for gasoline is set to decline drastically over the 2019 to 2025 time period (click to enlarge below image). The projection is based both on short-term demand disruptions related to COVID-19 and long-term trends like more and more carbon cutting policies taking hold across the world and electric vehicles continuing to gain in popularity.

Photo Source: IEA

Just last year, BNP Paribas released a white paper concluding that the oil industry needs a breakeven price of $10-$20 per barrel to remain competitive in the transportation sector. That basement level price is basically where oil has been trading during the COVID-19 crisis and we see the resulting havoc that has caused. Imagine an environment where that is the permanent status quo for the industry?

Simply put, it is hard to envision a plausible scenario in which the oil and gas industry – and fossil fuels in general – make a full recovery from the current crisis.

Oil Epicenter of U.S. Sees Boom in Solar Projects

The state of Texas is without question the de facto capital of the U.S.’s oil and gas industry. In 2018, the Lone Star State accounted for over 40% of the nation’s total crude oil production at 1.8 billion barrels. This sum was more than 3.5 times higher than North Dakota, the next largest state producer of crude oil (512,287 bbl).

West Texas is the engine that powers the state’s massive oil production capabilities. This corner of the state is enveloped by much of the Permian Basin, a large sedimentary basin noted for its rich petroleum and natural gas deposits. The oil fields in West Texas have been a fixture of the region’s landscape for as long as anyone can remember. However, solar farm infrastructure is now popping up in the region more and more, providing evidence of a rapid energy transition that is playing out in real time.

In many respects, Texas makes all the sense of the world as the next frontier to power the nation’s solar industry growth. There is built-in demand thanks to Texas’ spot as the nation’s leader in electricity consumption. The state’s pro-business, pro-energy reputation makes for an awfully favorable regulatory environment for solar businesses looking to expeditiously bring projects to the market. And let’s not forget the overabundance of sunshine that blesses West Texas throughout most of the year.

Photo Source: Financial Times

These factors have increasingly thrust West Texas onto the energy map, the renewable energy map that is. Odessa, TX will soon be home to one of the largest solar projects in the country as Facebook partners with renewable energy developer, Longroad Energy, to construct a mammoth 379 MW solar farm. The below map of planned and completed solar developments in Texas show that Facebook isn’t the only one fueling the renewable energy transformation of West Texas.

Solar Still Likely to Face Adversity

To be clear, just because the oil and gas industry is in the midst of an unprecedented contraction doesn’t mean that the solar industry is set to ascend at a comparable level. Afterall, there are few winners during a deep recession, and the U.S. is likely heading for its worst one since the Great Depression.

The solar industry – like just about every other industry – is poised to shed jobs and shelve capital investments at levels hardly imaginable just months ago. The Solar Energy Industry Association (SEIA) predicts that the industry could shed up to half of its 250,000 workers in COVID-19-impacted months alone. Clean tech analysts at Morgan Stanley predict declines of 48%, 28%, and 17% in solar photovoltaic installations in the U.S. across the 2nd, 3rd, and 4th quarters of this year. Meanwhile, a Wood Mackenzie analysis predicts a 43 percent drop in global electric vehicle sales this year, and significant disruption to the supply chain for energy storage.

Unlike the oil and gas industry, however, momentum remains firmly on the side of renewables. Temporary industry contractions will be painful, but the long-term return on investment of renewable energy projects remains unmistakably brighter for renewables than the oil and gas industry. The proliferation of state renewable energy targets and solar mandates will help to buoy the industry through otherwise uncertain times. Public pressure and the increasingly favorable economics of solar will continue to draw brand name corporate users to the market. The rapid technologization of the solar industry will continue, dragging down prices for consumers and bringing previously unthought-of products to the market (hello solar roof tiles).

The march towards decarbonization will no doubt be interrupted by COVID-19 as renewable energy supply chains splinter, investment dries up, demand sputters, and workers experience layoffs. While these disruptions will seem significant at the time, they are all temporary in nature. Meanwhile the oil and gas industry may be in the midst of an inflection point that it might very well never fully recover from. After all, why would someone risk their capital in an industry whose central product can fall below its breakeven point for extended periods of time?

So, while the sun will continue to slowly set on the oil and gas industry, the solar industry still has plenty of bright days ahead of it and we remain eager to realize this future.